A risk sharing proposal for student loans

Abstract

Many borrowers have difficulty repaying their federal student loans, particularly at certain institutions. This paper proposes an institutional accountability system that is intended to help align incentives of institutions with their student loan borrowers and taxpayers. Under the risk-sharing proposal, institutions with poor loan performance reimburse the federal loan program for a fraction of unrepaid loan dollars. In particular, the proposal uses a robust and hard-to-manipulate repayment rate—the amount each institution’s students have repaid after five years—to set minimum thresholds below which institutions would have to contribute. Recovered funds could be used to provide support to institutions that serve low-income students well.

The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.